Analyzing International Relations and American Politics

Trickle-Down Economics is Eerily Like Communism

Ever since the “Reagan Revolution,” conservatives have been enamored of the idea of trickle-down economics. The theory of trickle-down economics posits that economic growth can be best stimulated by lowering taxes and allowing wealthy members of society to invest in profitable ventures, expanding the overall economy and creating jobs. In other words, by giving the wealthy a larger slice of the economic pie, one boosts the overall size of the pie and everyone benefits. Ultimately, though, this kind of logic is exactly the same kind of logic found in technocratic communism. In both systems, an elite investor class decides where to invest based on their economic forecasts of which industries and firms will be most profitable. The only difference is that in communism, this elite investor class is made up of government bureaucrats who draw up five-year plans instead of Wall Street investors who seek to outperform the stock market.

Most critics of communism (of which I am one) contend that economies are simply too complex and large to be centrally managed. While it might be true that an omnipotent and omniscient government could create an economic system more effective than a free market, this kind of government will simply never exist. Thus, the next best approach is capitalism, in which individuals pursue their own interests, allocating goods and resources in the most efficient way possible. The problem with trickle-down economics is that it actually creates many of the problems capitalism seeks to avoid by concentrating economic power in the hands of a very few, who then try to use their wealth to determine the direction of the economy. Often, investors make profitable investments that boost economic growth and generate positive returns for society. However, investors can also fail quite spectacularly. Just look at past financial crises, for example. Economic elites can also use their power and influence to bias economic growth in their favor, and thus we end up with endemic corruption not unlike that found in centrally-planned state economies.

Of course, the standard response from those on the right is that communism and trickle-down economics are not at all similar because communist bureaucrats aren’t investing their own money. This is certainly a compelling argument… until one bothers to look at the empirical record. In 2008, for example, investors’ losses were largely mitigated by public bailouts. Thus, investors’ money was never really at risk, as they knew their governments would (at least partially) cover their losses. Indeed, bank bailouts were the primary reason for the European sovereign debt crisis spiraling out of control: Governments were spending responsibly, but they were forced to assume large amounts of private debt through bailouts. Now, for the record, bailing out the banks was the right call. The alternative was to watch the entire global financial system collapse, and that would have been orders of magnitude more catastrophic than even the Great Depression. However, the fact that governments were forced to use large amounts of public money to bail out private actors speaks to the eerie similarity between trickle-down economics and communism. Both systems rely on elite decision-makers (investors and bureaucrats, respectively) to try to predict and shape economic growth. When they fail, the government steps in to cover up their mistakes, and everyone else suffers as a result.

Wall Street investors aren’t secret geniuses able to see into the future and adroitly navigate economic developments. Many of them are very intelligent people, but they don’t have some kind of privileged insight into the inner workings of the economy. Thus, it’s not surprising that when taxes became more progressive after World War II (with the wealthiest income bracket at one point paying a marginal rate of 90%), there was no noticeable decline in GDP growth. Indeed, the period between 1950-1973 saw some of the highest rates of economic growth in American history. When, in the early 80s, taxes were lowered significantly on the highest income bracket, we saw rapid economic growth in the short term. However, longer term growth rates have actually been noticeably smaller than during the post-WWII period. If trickle-down economics were accurate, we should actually be witnessing the opposite.

Communism is, of course, not equivalent to Reagan-style tax cuts. The entire logic of communist ethics is radically different from that of pro-market theorists like Hayek, for example. Moreover, the kinds of political structures that tend to accompany communist economies are far more authoritarian and malevolent than those that are associated with liberal, capitalist economies. Nevertheless, the economic logic underpinning both models is eerily similar, which should raise questions for proponents of both models.